Although marijuana stocks have tapered off a bit to end the year, this will nevertheless go down as the most groundbreaking year in cannabis history. In October, Canada became the first industrialized country in the world to legalize recreational weed. In doing so, Canada demonstrated the validity of the pot industry, as well as opened to door to potentially billions of dollars in added annual sales.
Canada's neighbor also had a nice showing. Two more states legalized medical marijuana in November, bringing the total number of states to have legalized weed in some capacity to 32. Residents in Michigan also voted in favor of their adult-use proposal, marking the 10th state to give recreational pot the green light in the United States.
Canopy Growth is now worth two Aurora Cannabis'
Aurora Cannabis, following the completion of its ICC Labs acquisition, could generate an author-estimated 700,000 kilograms of peak annual production within the next three years. Should it decide to construct greenhouses on ICC's additional acreage, as well as land adjacent to MedReleaf's Exeter facility, Aurora could easily surpass 1 million kilograms of annual production.
Meanwhile, Canopy Growth has about three-quarters of its 5.6 million square feet of growing capacity already licensed by Health Canada, but it'll likely "only" be producing around 500,000 kilograms at peak capacity. Aurora has the capability to possibly double Canopy Growth's production, yet Canopy Growth's $10.8 billion market cap has Aurora Cannabis' $5.4 billion market value perfectly doubled up.
What gives, you wonder?
The broad answer is that there's a lot more to successfully running a marijuana company than just production. Canopy Growth offers its investors a number of advantages over Aurora Cannabis beyond just annual output, making it the more attractive investment opportunity.
The more specific answer is that it has to do with the following four factors.
1. Canopy Growth has a brand-name partner
To begin with, Canopy landed itself a giant partner in Constellation Brands (STZ -1.45%). The maker of Modelo and Corona beers has actually made three notable investments into Canopy:
- An approximately $190 million equity investment in October 2017 for what amounted to a 9.9% stake in the company at the time.
- The purchase of 200 million Canadian dollars in convertible notes out of a CA$600 million offering in June 2018. These notes can be converted into common stock, which would could up its equity stake in the company.
- The purchase of 104.5 million shares of Canopy's common stock, announced in August 2018, for $4 billion.
Not only does this signify that Constellation and Canopy are likely to work on cannabis-infused beverages, when legal, but Constellation's deep pockets and marketing prowess could open new doors for Canopy Growth's products in foreign markets. Even with Aurora Cannabis having a presence in 18 markets right now, that pales in comparison to Constellation's foreign presence and what it could do for Canopy Growth.
2. Canopy Growth is a buyout candidate, whereas Aurora isn't
Secondly, investors recognize that Constellation's "partnership" with Canopy Growth goes beyond product development. Following its $4 billion equity investment, Constellation has a 37% stake in Canopy Growth. Should it choose to exercise the more than 139 million warrants it also received, Constellation could up its stake in the company to more than 50%. Though traditionally conservative with regard to managing its debt levels, a buyout of what's not already owned by Constellation Brands becomes a possibility by perhaps 2021 or 2022.
The same can't be said for Aurora Cannabis, which has yet to land a brand-name partner and has no notable equity investors in the beverage, tobacco, or pharmaceutical industries. In other words, Canopy Growth receives a premium because of the buyout potential that's on the table.
3. Canopy's cash position is much healthier, meaning less dilution
Continuing to build on these points, Canopy Growth also now has well over $4 billion in cash and cash equivalents on its balance sheet that it can use for acquisitions, brand building, marketing, international expansion, and to build its sales channels. Since cash is such a precious commodity for marijuana stocks, this means less of a chance that Canopy Growth needs to raise additional capital in the next couple of years.
The reason this is so important is that pot stocks like Canopy and Aurora have regularly turned to bought-deal offerings to raise capital. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants to investors. Doing so can balloon a company's outstanding share count, weighing on existing investors and pushing earnings per share lower.
In the quarters to come, we should see less of a dilutive impact from Canopy Growth than we see from Aurora Cannabis, which still predominantly relies on bought-deal offerings to raise capital.
4. There's a big difference in branding
Last, but not least, Canopy Growth has what's arguably the most well-known brand throughout Canada: Tweed. Canopy has spent years building up its recreational and medicinal brands, and it's translated into a large number of registered patients, and more than 70,000 kilograms of committed annual supply to provinces. While this isn't to say that Aurora hasn't worked out provincial deals or garnered quite a few registered medical patients, there's a clear gap with regard to brand building between the two companies.
Until we see Aurora partnered with a brand-name company and focusing on aspects beyond capacity expansion, Canopy Growth is likely to hover over it in terms of market cap.